Class Notes

Class: XI Topic: FINANCIAL STATEMENT

Subject: ACCOUNTANCY

Financial Statement: It is a statement containing statement of profit & loss and Position statement. It shows
performance and financial position of business at the end of an accounting period. To know the performance
of business, we prepare Trading and Profit & Loss Account ( Statement of Profit and Loss) and to know the

financial position of the business, we prepare Balance Sheet (Position Statement).

Distinction between Capital and Revenue items:

The distinction between Capital and Revenue items has important implications for making of the trading and
profit and loss account and balance sheet. The revenue items form part of the trading and profit and loss
account and the capital items help in the preparation of a balance sheet.

Revenue Expenditure: If the benefit of any expenditure extends up to one accounting period, it is termed as
revenue expenditure. Normally, they are incurred for the day-to-day conduct of the business. Examples are:
Payment of salaries, rent etc.

Capital Expenditure: If the benefit of any expenditure extends more than one accounting period, it is termed
as capital expenditure. For example: Payment made to acquire assets.

Capital Expenditure Revenue Expenditure

1. It is incurred to increase earning capacity of
business.
2. It is incurred to acquire fixed assets for operation
of business.
3. These expenditure are of non-recurring nature.
4. Capital expenditure benefits the firm for more
than one accounting period.
5. It is recorded in Balance sheet.
1. It is incurred to maintain the earning capacity of
business.
2. It is incurred for day-to-day conduct of business.
3. These expenses are of recurring nature.
4. Revenue expenditure benefits the firm for one
accounting period.
5. It is recorded in trading and Profit & Loss Account.

Deferred Revenue Expenditure: The heavy revenue expenditure incurred which is likely to benefit the firm for

more than one accounting period are termed as Deferred Revenue Expenditure.

Distinction between Capital Receipts and Revenue Receipts:

Capital Receipts: If the receipts imply an obligation to return the money, are capital receipts. Example:
additional capital brought in by the owner, a loan taken from the bank or sale of fixed assets.

Revenue Receipts: If a receipt does not incur an obligation to return the money or is not in the form of a sale
of fixed asset, it is termed as revenue receipt. Example: rent received, interest received etc.
Objectives of Financial Statement: The basic objectives of preparing financial statements are :

(a) To present a true and fair view of the financial performance of the business

(b) To present a true and fair view of the financial position of the business

For this purpose, the firm usually prepares the following financial statements:

1. Trading and Profit and Loss Account: also known as Income statement, shows the financial performance of
the business.
2. Balance Sheet: shows financial position in the form of assets, liabilities and capital.

Trading and Profit & Loss Account: It is prepared to determine the profit earned or loss sustained by the
business enterprise during the accounting period. It is basically a summary of revenues and expenses of the
business and calculates the net figure termed as profit or loss.

Trading and Profit & Loss Account

Particulars Amount Particulars Amount

To Opening Stock By Sales
To Purchases Less: Return Inward
Less: Return outwards
By Closing Stock
To Wages
To Carriage/Carriage
inward/Carriage on purchase By Gross Loss (Transferred to
To Freight inward Profit & Loss A/c.) (Balancing
To Import duty figure)
To Coal, Gas and Water
To Productive Expenses
To Manufacturing Expenses
To Factory Expenses
To Power
To Gross Profit( Transferred to
P/L A/c) (Balancing Figure)

To Salaries By Gross Profit

To Rent/Rates and taxes By Discount received
To Repairs and Renewals By Interest received
To Bad Debts By Rent received
To Commission By Commission received
To Advertisement
To Depreciation By Net Loss (Transferred to
To Discount allowed Capital Account)
To Interest on loan (Balancing Figure)
To Loss on sale of assets
To Loss by fire
To Net Profit (Transferred to
Capital Account)
(Balancing figure)
 Trading Account includes Opening Stock, Purchases and Direct Expenses in Debit Side and Sales and
Closing stock in credit side.
 Excess of credit (Sales+ Closing Stock) over debit (Opening expenses+ Purchases+ Direct Exp.) of
trading account results into Gross Profit.
 Excess of debit (Opening expenses+ Purchases+ Direct Exp.) over credit (Sales+ Closing Stock) results
into Gross Loss.
 Gross Profit = Net Sales – Cost of Goods Sold

 Cost of Goods sold = Opening Stock+ Purchases+ Direct Exp. – Closing stock.
 Direct expenses means all expenses directly connected with the manufacture and purchase of goods.
It includes carriage inwards, freight inwards, wages, factory lighting, coal, water and fuel etc. Direct
expenses are recorded in Trading Account.
 Profit and Loss Account includes indirect expenses and losses on debit side and other income on the
credit side.
 Excess of credit (Gross profit + other income) over debit (Indirect exp. and losses) results into Net
Profit.
 Excess of debit (Indirect exp. and losses) over credit (Gross profit + other income) results into Net Loss
 Indirect Expenses are expenses which are not directly associated with the goods; these expenses are
incurred for the operation of business. Indirect expenses include operating as well as Non-operating
expenses.
 Net Profit= Gross Profit+ Other Income- indirect expenses.
 Operating Profit: It refers to the profit earned from normal operation of business.

 Operating Profit= Gross profit- Operating Expenses. OR

 Operating Profit= Net Profit+ Non-operating expenses- (Non-operating income)
 Example of operating expenses: administration expenses and selling and distribution expenses i.e.
Salaries, Rent, advertisement, carriage outward, Printing and stationery etc.
 Example of Non-operating expenses: Interest on loan, charity, donation, loss on sale of assets, loss by
fire etc.
 Example of Non-operating income: interest on investment, profit on sale of assets, rent received,
dividend received etc.

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